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Nonlinear Exchange Rate Adjustment in the Enlarged Eurozone: Evidence and Implications for Candidate Countries

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  • Nikolaos Giannellis
  • Athanasios P. Papadopoulos

Abstract

This paper sheds light on the importance of the validity of PPP hypothesis for the accessing process of the candidate countries towards EMU. The evidence of nonlinear adjustment in real exchange rates suggests the estimation of a nonlinear SETAR model. While linear half-life estimates are biased upward (five years on average), SETAR half-life estimates imply a faster reverting process (1.5 years on average). Moreover, we found that TPI-based real exchange rates are more appropriate than CPI-based real exchange rates in testing for PPP hypothesis. For the cluster of EMU countries and for the pre-EMU period, our nonlinear model confirms stationarity for the majority of the TPI-based real exchange rates with half-life estimates less than a year. Copyright � 2010 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 4 (09)
Pages: 741-757

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Handle: RePEc:bla:reviec:v:18:y:2010:i:4:p:741-757

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  1. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February.
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  7. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
  8. Xu, Zhenhui, 2003. "Purchasing power parity, price indices, and exchange rate forcasts," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 105-130, February.
  9. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
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Cited by:
  1. Giannellis, Nikolaos, 2013. "Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test," Research in Economics, Elsevier, vol. 67(2), pages 133-144.

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